The primary objective of a benefit plan’s financial statements is to provide information that is useful in assessing the plan’s present and future ability to pay benefits.
Financial reporting for employee benefit plans financial statement audits may involve many parties, including the plan sponsor’s financial accounting and human resources departments, a third-party administrator, investment trustees and custodians, an actuary, ERISA legal counsel and the independent auditor. Plan management may hire service organizations to perform record keeping and reporting functions, but the ultimate responsibility for accurate financial reporting rests with plan management.
One of the most important duties of plan management is to hire the independent auditor. In some cases the plan sponsor may have an audit committee, employee benefits committee or administrative committee that oversees the financial reporting process, including internal control over financial reporting and the appointment, compensation and oversight of the independent auditor. The plan financial reporting and audit environment is unique in many respects, including the nature of plan operations; the various laws and DOL and Internal Revenue Service (IRS) regulations with which plans must comply; and special reporting and audit requirements. These matters, which affect every plan, add to the complexity of an employee benefit plan audit. Other matters that may complicate the plan reporting and audit process may include changes to the plan document; plan mergers, freezes or terminations; and changes in service organizations.
Purpose and Objectives of the Independent Audit
The Employee Retirement Security Act of 1974 (ERISA) generally requires employee benefit plans with 100 or more participants to have an independent financial statement audit as part of the plan sponsor’s obligation to file a Form 5500.
Financial statement audits provide an independent, third-party opinion to participants, plan management, the DOL and other interested parties that the plan’s financial statements provide reliable information to assess the plan’s present and future ability to pay benefits. A financial statement audit helps protect the financial integrity of the employee benefit plan, which helps users determine whether the necessary funds will be available to pay retirement, health and other promised benefits to participants. The audit may also help plan management improve and streamline plan operations by evaluating the strength of the plan’s internal control over financial reporting and identifying control weaknesses or plan operational errors. And the audit helps the plan sponsor carry out its legal responsibility to file a complete and accurate Form 5500 for the plan with the DOL.
The overall objectives of the plan auditor under professional standards are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error and to report on the financial statements in accordance with his or her findings. In addition, the DOL requires the independent auditor to offer an opinion on whether the DOL-required supplemental schedules attached to the Form 5500 are presented fairly in all material respects, in relation to the financial statements as a whole.
To accomplish these objectives, the auditor plans and performs the audit to obtain reasonable assurance (see a discussion of reasonable assurance below) that material misstatements, whether caused by error or fraud, are detected. The auditor assesses the reliability, fairness and appropriateness of the plan’s financial information as reported by plan management. The auditor tests evidence supporting the amounts and disclosures in the plan’s financial statements and DOL-required supplemental schedules; assesses the accounting principles used and significant accounting estimates made by management; and evaluates the overall financial statement presentation to form an opinion on whether the financial statements as a whole are free of material misstatement.
General Benefit Plan Audit Considerations
The following are some general audit considerations for all employee benefit plan financial statement audits.
- Generally Accepted Auditing Standards
- Adequate Technical Training and Proficiency
- Professional Skepticism
- Auditor Independence
- Reasonable Assurance and Materiality
- Professional Judgment
- Auditor Communications
Full Scope vs. Limited Scope Benefit Plan Audits
Typically, financial statement auditors are engaged to audit and report on the reporting entity’s financial statements, including all assets; liabilities and obligations; and financial activities. These audits are performed without any client-imposed scope limitation or other restriction. ERISA is unique in that, when certain criteria are met, it permits plan management to instruct the auditor to limit the scope of testing of investment information included in the financial statements. This limited scope election must be supported by a certification from a qualified entity as to both the accuracy and completeness of the plan’s investment information. Such audits are referred to as “limited scope” audits. Plan management is responsible for determining that the conditions of the limited scope audit exemption have been met.
Benefit Plan Audit Areas
The financial statement audit for employee benefit plans typically cover employee and employer contributions; benefit payments; plan investments and investment income (full scope audits); participant data; participant allocations; liabilities and plan obligations; loans to participants; and administrative expenses. In addition, the auditor considers other matters that may affect the financial statements, as shown below.
To learn more about benefit plan audits, and to find out if one is required for your company’s 401(k) plan, download the whitepaper here: Guide to Employee Benefit Plans – Financial Statement Audits Whitepaper The Whitepaper includes:
- Plan Financial Reporting and Audit Process and Management’s Responsibilities
- Purpose, Objectives, and Benefits of an Independent Audit
- General Audit Considerations
- Full Scope vs. Limited Scope
- Audit Areas
- The Audit Process
- Auditor’s Report
- Your Role in the Audit Process
- Additional Resources
For more specific information about how the requirement of an benefit plan audit will affect your company, contact our in-house expert, Mike Rizkal, CPA.